Markets @ Bidvest Bank - 11 August 2014

Fundamentals:

US:
• The safe haven bid on global markets has been significant and is reflected in the recovery of UST yields off their lows late on Friday after news that Russia was winding down military exercises on Ukraine’s border. Russian separatists had asked for a ceasefire on Sat after it appeared they were losing the battle to gain Donetsk. Rebels have been asked to surrender.
• Data out of the US on Friday showed that price pressures are likely to have remained relatively tame as productivity gains suggested that the Fed would have the flexibility to remain accommodative for a while still.
• As Argentina continues to argue that it has made a debt payment, a US court is about to hold the country in contempt for making such assertions as it runs against a court order requiring full payment.
UK:
• On the data radar this week, the ILO employment release for Jun alongside the BoE inflation report, both due for release on Wed, will be the first major points of focus. Markets are looking for insight as to how the BoE balances subdued wage growth against pressures mounting from the cyclical rebound. Beyond this, the preliminary Q2 GDP data on Fri will take focus, with consensus looking for an unchanged print of 3.1% y/y from the advanced reading released last month.
• Hamptons International believes that London house price growth will cool significantly to just 3% in 2015. This follows a survey from Lloyds which showed that house price growth slowed to the weakest growth since 2011 as banks tighten lending standards. Perspective is however required, this is slowing growth not negative growth off very high prices.
Asia:
• The BoJ’s monthly economic report for August is scheduled for release this morning. It will be instructive to note what the BoJ is expecting for Q2 GDP growth, with data scheduled for release this Wednesday. Consensus is looking for a steep q/q contraction in GDP output given the negative impact that the April sales tax hike and softer than expected exports demand likely had on the economy.
• Data released overnight showed Japan’s tertiary industry index contracted 0.1% m/m in June after expanding 0.9% in May. Keep an eye out for prelim machine tool orders data for July at 06:00 GMT.
EU:
• Political tensions in Italy’s parliament are running high as PM Renzi looks to de-shackle Italy’s decision making process through the upper house powers being drastically reduced. Italy’s Senate passed a first reading of the bill on Friday which Renzi is targeting as a prerequisite for the govt to be allowed to make the necessary structural reforms.
• Last week saw the Bank of France estimate that the French economy w0ould grow by around 0.2% in Q3. This comes as France is expected to revise down its official forecasts for growth in 2014 to just 0.7%.
• A sign that internal demand is starting to recover in some peripheral economies was seen in Portugal as the trade data swung into a more significant deficit. Cessation of oil refinery exports has weighed on data.

Developments worth noting:
• The SARB announced a bailout of African Bank (ABIL) yesterday and it is worth clarifying a few points on the matter. The bank will be stripped into a good and bad bank – the good bank being recapitalised by a consortium of other banks and the PIC, and the bad bank (asset book worth R17bn) will be bought by the SARB for R7bn. Note though that the R7bn funding will come from the National Treasury, so effectively more of a fiscal programme than a QE-type one. ABIL may be more systemically important than its raw size suggests at a time when the SARB has deemed the economy too fragile to a potential shake-up in the banking sector.
• However, the move speaks to a politically motivated one where bank nationalisation is currently a hotly discussed topic in the ANC. Tito Mboweni, former SARB Governor, recently said the state should begin buying equity in one of SA’s banks. This also dovetails perfectly in the ANC’s “development finance” objectives which aim to provide subsidised finance to black entrepreneurs and increase access to mortgage finance. If one looks at the size of ABIL’s short-term deposits of R4.5bn, just 3.5x its required SARB reserves as opposed to a 40-50x ratio for the major SA banks, the threat of a bank run that ABIL could not defend is therefore extremely remote, especially since the bulk of those short term deposits are liabilities to the other SA banks themselves. Insight into the potential effect on the national budget will be sought going forward.
• Meanwhile internationally, there has been no shortage of geopolitical-driven risk aversion of late, but some of this risk aversion is now subsiding on news that Russia has confirmed an end to its military exercises on the Ukrainian border and that Israel and Palestine have agreed to a 72-hour ceasefire following the US airstrikes on Iraq. It has however taken increased economic sanction and militaristic steps in order to get to this point, however, and we know from past experience that Russian de-escalations can prove short-lived, implying potential for such market pressures to creep back in again over time. For now, the dissipation of immediate pressures has seen global stock markets rally off their lows.
Data/Events for the next week:
• The June retail sales and mining production figures this week are likely to play into what remains a weak view on domestic growth, with retail sales especially important as a barometer for consumption demand for the SARB as it seeks to remain as accommodative as possible through the hiking cycle. High inflation and unemployment remain a burden to consumers, and of interest is the fact that the figures are likely being supported by the higher confidence in high income households. Mining production meanwhile will continue to be impacted by strike effects as of the June reading.
• Internationally, markets will be looking for further evidence of the US upswing through the July retail sales numbers. Note though that recent data has shown that while productivity levels increased in Q2 off their Q1 slump, wage growth remains subdued and may inhibit the real growth the retail sector experiences. Other key events will be the UK’s BoE inflation report as well as its second reading of Q2 GDP.

Trade Weighted ZAR:

• The trade-weighted rand has fluctuated between gains and losses in each trading session looking back to the start of last week, resulting in a month-to-date movement of close to zero. When a broader view is taken, these fluctuations have come off what has been a weakening in the local currency since late July and the failure to significantly correct these losses indicates on-going nervousness surrounding its persistent fragility. Of primary concern to the markets recently has been the mounting geopolitical tensions in both the Ukraine and Gaza, and so a hint of dissipation of these tensions over the weekend has offered mild relief.
• During the geopolitical-led flight to safety, the rand has struggled against the typical safe-haven currencies including the USD and JPY. Weekly performances indicate that the rand has struggled more frequently against these currencies in the short term. The USD’s broader strength is simply supplemented by this risk aversion, however; it is primarily gaining on the back of the cyclical upswing in the US where data continues to generate speculation of a normalisation in Fed policy. Under these conditions, the rand’s trade-weighted performance is likely to be hampered by a rebounding USD for some time to come.
• The rand is still regarded as one of the most fragile EM currencies, showing a heightened susceptibility to flow-led weakness given its poor underlying fundamentals. Data this week is likely to re-emphasise the soft growth conditions the domestic economy finds itself in, which is not only a concern in terms of keeping interest rates below adequate levels but also due to the negative fiscal implications. The bailout of African Bank has not been hugely market-moving as it represented a fairly small short-term depositor base within the banking sector as a whole, but does offer reflection on the shaky state of the unsecured lending market as part of the theme of household financial pressures.

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